Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

You should read the following discussion and analysis of our financial condition
and results of operations together with the condensed consolidated financial
statements and related notes that are included elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
February 28, 2014. The last day of our fiscal year is February 28/29. Our fiscal
quarters end on May 31, August 31, November 30 and February 28/29. This
discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth in Part I, Item 1A, of our Annual
Report on Form 10-K for the fiscal year ended February 28, 2014.

Overview

Barracuda designs and delivers powerful yet easy-to-use security and storage
solutions. We offer cloud-connected solutions that help our customers address
security threats, improve network performance and protect and store their data.
Our solutions are designed to simplify IT operations for our customers, allowing
them to enhance their return on technology investment. Our business model is
built on the core values of speed and agility, which we apply to all aspects of
our approach, including our technology innovations, the delivery and deployment
of our solutions and responses to customer inquiries.

We derive revenue from sales of appliances and subscriptions. Revenue from the
sale of our appliances includes hardware and a perpetual license. Subscription
revenue is generated primarily from our subscription services such as our
Barracuda Energize Updates as well as our cloud solutions. Subscription revenue
also includes revenue from fixed term licenses of our virtual appliance software
support and maintenance. Our subscription terms range from one to five years,
the substantial majority of which are for one-year periods. Subscriptions are
billed in advance of the purchased subscription period. Renewal rates from
subscriptions, on a dollars basis, have been 94% and 97% for the three months
ended May 31, 2014 and 2013, respectively.

The growth of our business and our future success depend on many factors,
including our ability to continue to expand our customer base, pursue cross-sale
opportunities and grow revenues from our existing customer base, expand our
distribution channels, particularly internationally, and continue to develop new
solutions to promptly respond to our customers' needs. Our sales and marketing
initiatives are primarily focused on higher-growth segments within the security
and storage markets, such as next generation firewall appliances and
purpose-built backup appliances. Although the mix of solutions sold can vary
from period to period, in recent periods we have experienced stronger growth in
sales of storage and application security solutions. Our future success will
depend in part on our ability to continue to expand our sales in these
higher-growth segments. While these areas represent significant opportunities
for us, they also pose risks and challenges that we must successfully address in
order to sustain the growth of our business and improve our operating results.

Our Business Model

We invoice at the time of sale for the total price of the solutions we deliver,
and we typically collect cash in 30 to 60 days. We refer to the total amount of
invoices we issue in a period as gross billings. All of the gross billings we
record are recognized as revenue ratably under GAAP, once all revenue
recognition criteria have been met. Gross billings are initially recorded as
deferred revenue, less reserves. The appliance component of our gross billings
is recognized ratably as revenue over the estimated customer relationship
period, which is typically three years, commencing upon the activation of the
unit by the end customer. The subscription component of our gross billings is
recognized ratably as revenue over the contractual period of the subscription.
Because we bill in advance for the entire term, substantially all of our new and
renewal gross billings increase our deferred revenue balance, which contributes
significantly to our cash flow.

Factors Affecting our Performance

We believe that our future success will be dependent on many factors, including
our ability to increase sales of our solutions to new customers as well as to
increase sales of additional solutions to our existing customers and to add
incremental capabilities that will solve emerging customer issues. While these
areas present significant opportunity, they also present risks that we must
manage to ensure successful results. Additionally, we face significant
competition across all of our market segments and must continue to execute
across all functions and add qualified personnel to succeed in these markets. If
we are unable to address these challenges, our business could be adversely
affected.

Investment in Sales and Marketing. In order to support future sales, we will
need to continue to invest significant resources devoted to our sales force and
global network of partners and resellers. We have made and plan to continue to
make significant investments in expanding our sales teams and distribution
programs with our channel partners and increasing our brand awareness. Any
investments we make in our sales and marketing will occur in advance of our
experiencing any benefits from such investments, and so it may be difficult for
us to determine if we are efficiently allocating our resources in this area. We
cannot assure that the investments we have made, or intend to make, to
strengthen our sales and marketing efforts will result in an increase in revenue
or an improvement in our results of operations. We believe that our

Table of Contents

investment in sales and marketing will help us grow our revenue and improve our
results of operations in the long-term. However, the resulting increase in
operating expenses attributable to sales and marketing may impact our
profitability in the near-term.

Investment in Product Development. Our performance is significantly dependent on
the investments we make in our research and development efforts, and in our
ability to continue to innovate, improve functionality, adapt to new
technologies or changes to existing technologies. We intend to continue to
invest in new solution development and enhancements to our existing solutions.
We cannot be assured that we will realize increased revenues from our
development initiatives. We believe that our investment in product development
will contribute to long-term revenue growth, but it may impact our near-term
profitability.

Investment in Infrastructure. In order to support our operations, we have made
and expect to continue to make substantial investments in our infrastructure in
connection with enhancing and expanding our operations domestically and
internationally. For example, we intend to continue to invest in our software
systems and additional data center resources to keep pace with the growth in the
cloud and cloud-based solutions markets. We also expect to make additional
investments in our infrastructure, which will result in increased general and
administrative expenses. We believe that our investment in infrastructure will
contribute to improvements in our operating results in the long-term; however,
it will limit our available capital resources and impact profitability in the
near-term.

We believe the renewal rate is an important metric to measure long-term value of
customer agreements and our ability to retain our customers. We calculate our
renewal rate by comparing the actual dollar amount of contracts renewed in a
period to the dollar amount of the expiring contracts in that period, less the
value of the expiring contracts that are upgraded to a higher model of the same
product in lieu of a renewal. Changes in our renewal rates will have an impact
on our revenue growth and operating results.

Cross-sell Opportunity. The continued growth of our business partially depends
on our ability to sell additional solutions to our existing customers. We define
a solution as a distinct product line that we offer, such as Web Filter or
Message Archiver. As our existing customers' IT buying needs evolve, or as our
customers realize the benefits of the solutions that they previously purchased,
our portfolio of solutions provides us an opportunity to cross-sell additional
solutions. Customers who successfully deploy more than one type of solution
provide substantially more customer lifetime value to us, and can derive greater
value from our solutions as they benefit from synergies in management, support
and functionality. To support our cross-sell efforts, we intend to continue
adding higher touch sales and marketing field resources to liaise with our
channel partners as we continue to grow our sales both domestically and
internationally. We expect that our continued investment in resources to expand
our cross-sell efforts to existing customers will result in longer-term revenue
growth opportunities.

Key Metrics

We monitor the following key metrics to help us evaluate growth trends,
establish budgets and assess operational efficiencies. In addition to our
results determined in accordance with GAAP, we believe the following non-GAAP
and operational measures are useful in evaluating our operating performance.

The following presents our key metrics and provides reconciliations of the most
directly comparable GAAP financial measure to each non-GAAP financial measure
(dollars in thousands):

(1) In order to determine how our business performed exclusive of the effect of
foreign currency fluctuations, we compare the percentage change in our gross
billings from one period to another using a constant currency. To present
this gross billings information, the current and comparative prior period
results for entities that operate in other than U.S. dollars are converted
into U.S. dollars at constant exchange rates. For example, the rates in
effect at May 31, 2013, which was the last day of our prior fiscal year's
first quarter, were used to convert current and comparable prior period gross
billings rather than the actual exchange rates in effect during the
respective period.

Table of Contents

Gross billings. We define gross billings as total revenue plus the change in
deferred revenue and other adjustments which primarily reflect returns and
reserves with respect to the 30-day right to return we provide to our customers,
as well as rebates for certain channel partner activities, during a particular
period. We use gross billings as a performance measurement, based on our
business model of invoicing our customers at the time of sale of our solutions
and recognizing revenue ratably over subsequent periods. Accordingly, we believe
gross billings provide valuable insight into the sales of our solutions and the
performance of our business. The gross billings we record in any period reflect
sales to new customers plus renewals and additional sales to existing customers
adjusted for returns, rebates and other offsets, which we do not expect to be
recognized as revenue in future periods. In many cases, these returns, rebates
and other offsets occur in periods different from the period of sale, and are
unrelated to the marketing efforts leading to the initial sale, and therefore by
adjusting for such offsets, we believe our computation of gross billings better
reflects the effectiveness of our sales and marketing efforts.

The following table reconciles total revenue to gross billings (dollars in
thousands):

(1) In order to determine how our business performed exclusive of the effect of
foreign currency fluctuations, we compare the percentage change in our gross
billings from one period to another using a constant currency. To present
this gross billings information, the current and comparative prior period
results for entities that operate in other than U.S. dollars are converted
into U.S. dollars at constant exchange rates. For example, the rates in
effect at May 31, 2013, which was the last day of our prior fiscal year's
first quarter, were used to convert current and comparable prior period gross
billings rather than the actual exchange rates in effect during the
respective period.

In the three months ended May 31, 2014, gross billings increased 17% over the
prior year's comparative period. The increase in gross billings was primarily
driven by our continued ability to cross-sell additional solutions to existing
customers and the growth in our renewal subscriptions as a result of our high
level of customer retention as well as additional lead generation opportunities
and associated new customer billings. When evaluating our gross billings from
period to period, we also evaluate our gross billings for the two comparable
periods using a fixed exchange rate, thereby excluding the effect of currency
fluctuations.

Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus non-cash
and non-operating charges, which includes acquisition and other non-recurring
charges. Because of our business model, where revenue from gross billings is
recognized ratably over subsequent periods, substantially all of our gross
billings increase deferred revenue. Therefore, we believe that adjusting net
income (loss) for increases in deferred revenue and increases in the associated
deferred costs provides another indication of profitability from our operations.
We use adjusted EBITDA to measure our performance, prepare our budgets and
establish metrics for variable compensation. Because adjusted EBITDA excludes
certain non-cash and non-operating charges, this measure enables us to eliminate
the impact of items we do not consider indicative of our core operating
performance and to better measure our performance on a consistent basis from
period to period.

The following table reconciles net income (loss) attributable to Barracuda
Networks, Inc. to adjusted EBITDA (dollars in thousands):

(1) Represents expenses for the amortization of intangible assets, which relate
to purchased intangible assets associated with our acquisitions, and property
and equipment, as well certain losses on disposal of fixed assets.

Table of Contents
(2) In calculating adjusted EBITDA and free cash flow, we also adjust for
acquisition and other charges that we do not expect to recur in our
continuing operating results. We believe that adjusting for these charges
allows us to better compare adjusted EBITDA and free cash flow from period to
period in order to assess the ongoing operating results of our business.

Adjusted EBITDA increased to $19.4 million in the three months ended May 31,
2014 from $12.1 million in the three months ended May 31, 2013. The fluctuations
in adjusted EBITDA from period to period were based primarily upon changes in
gross billings and our investments in research and development.

Free cash flow. We define free cash flow as cash provided by operating
activities, less purchases of property and equipment plus acquisition and other
non-recurring charges. We consider free cash flow to be a useful liquidity
measure that considers the investment in cloud and corporate infrastructure
required to support our business and the impact of acquisition related expenses
and other non-recurring charges. We use free cash flow to assess our business
performance and evaluate the amount of cash generated by our business after
adjusting for purchases of property and equipment and acquisition and other
non-recurring charges.

The following table reconciles cash provided by operating activities to free
cash flow (dollars in thousands):

(1) In calculating adjusted EBITDA and free cash flow, we also adjust for
acquisition and other charges that we do not expect to recur in our
continuing operating results. We believe that adjusting for these charges
allows us to better compare adjusted EBITDA and free cash flow from period to
period in order to assess the ongoing operating results of our business.

Free cash flow increased to $4.2 million in the three months ended May 31, 2014
from $1.6 million in the three months ended May 31, 2013. The increase in free
cash flow was driven primarily by a $7.1 million increase in our net operating
assets and liabilities primarily due to increased deferred revenue and lower tax
payments in the three months ended May 31, 2014 and a $2.7 million change from a
net loss in the three months ended May 31, 2013 to a net profit in the three
months ended May 31, 2014 primarily due to increased revenue and a decline in
sales and marketing expense as a percentage of total revenue in the three months
ended May 31, 2014. The increases in cash flow were partially offset by a $2.7
million decrease in non-recurring charges mainly associated with the transition
of our CEO in the three months ended May 31, 2013.

Active subscribers. We define an active subscriber as a discrete appliance,
virtual appliance or cloud-only service that has activated at least one valid
subscription that has not been terminated. We monitor the total number of active
subscribers as a measure of the growth in our installed base, the success of our
sales and marketing activities and the value that our solutions bring to our
customers. As of May 31, 2014 and 2013, we had 214,339 and 184,232 active
subscribers, respectively. The increase in active subscribers over this period
is primarily related to our ability to attract and retain new customers.

Table of Contents

Our non-GAAP measures have limitations as analytical tools and you should not
consider them in isolation or as a substitute for an analysis of our results
under GAAP. There are a number of limitations related to the use of these
non-GAAP financial measures versus their nearest GAAP equivalents. First, gross
billings, adjusted EBITDA and free cash flow are not substitutes for total
revenue, net income (loss) and cash provided by operating activities,
respectively. Second, other companies may calculate non-GAAP financial measures
differently or may use other measures to evaluate their performance, all of
which could reduce the usefulness of our non-GAAP financial measures as tools
for comparison. Finally, adjusted EBITDA excludes some costs, namely, non-cash
stock-based compensation and depreciation and amortization expense, which are
recurring. Therefore adjusted EBITDA does not reflect the non-cash impact of
stock-based compensation or working capital needs that will continue for the
foreseeable future.

Acquisition and Other Non-Recurring Charges

In calculating adjusted EBITDA and free cash flow, we also adjust for
acquisition and other charges that we do not expect to recur in our continuing
operating results. We believe that adjusting for these charges allows us to
better compare adjusted EBITDA and free cash flow from period to period in order
to assess the ongoing operating results of our business. We refer to costs
related to our CEO transition, export compliance and acquisitions as our
"acquisition and other non-recurring charges" throughout this Quarterly Report
on Form 10-Q. These costs consist of the following:

CEO transition. Prior to fiscal year 2014, we incurred CEO transition costs
including severance payments made to our former chief executive officer and
related legal expenses, as well as recruitment and other fees related to the
hiring of our current chief executive officer. These costs also included costs
and bonuses related to the office of the CEO and bonuses for certain executives
paid in connection with the transition. These costs were classified primarily as
general and administrative expenses in our condensed consolidated statements of
operations. We did not incur such costs in the three months ended May 31, 2014
and 2013. In the three months ended May 31, 2013, free cash flow included
certain executive bonuses paid in connection with the transition.

Export compliance. Export compliance costs include legal expenses incurred in
connection with an internal investigation of our export controls compliance
procedures and the submission of our voluntary self-disclosures to the U.S.
government in this regard. These costs are classified as general and
administrative expenses in our condensed consolidated statements of operations.

Acquisition costs. Acquisition costs include legal expenses incurred in
connection with acquisitions as well as contingent consideration payments made
under the terms of certain acquisition agreements. The acquisition-related legal
expenses are classified as general and administrative expenses and the
contingent consideration payments are primarily classified as research and
development expenses in our condensed consolidated statements of operations.

The following tables present the details of our acquisition and other
non-recurring charges and their impact on adjusted EBITDA (in thousands):

We generate revenue from the sales of our appliances and subscriptions.

• Appliance Revenue. Revenue from the sale of our appliances includes
hardware and a perpetual license. We recognize appliance revenue over the
estimated customer relationship period of three years, commencing with the
end-user's activation of the appliance and related subscription, provided
all other criteria for the recognition of appliance revenue are met.

Table of Contents
• Subscription Revenue. Subscription revenue is generated primarily from our
subscription services such as our Barracuda Energize Updates as well as
our cloud solutions. Subscription revenue also includes revenue from fixed
term licenses of our virtual appliance software support and maintenance.
Our subscription terms range from one to five years, the substantial
majority of which are for one-year periods. We recognize revenue from
subscriptions and support and maintenance over the contractual service
period.

Cost of Revenue

Cost of revenue consists of costs related to our appliance and subscription
revenue. Such costs include hardware, manufacturing, shipping and logistics,
customer support, warranty, personnel costs, data center costs and amortization
of intangible assets related to acquired technology. We expect our cost of
revenue to increase in absolute dollars, although it may fluctuate as a
percentage of total revenue from period to period, as we continue to grow.